TAXATION

Tax changes affect wills and trusts

All existing trusts and all wills that create a trust should be reviewed in the light of fundamental tax changes introduced in the 2006 Finance Bill. New inheritance tax charges on most trusts will not immediately hit arrangements that were already in existence on Budget Day – 22 March 2006. But many people will want to change their wills as a result.

The Finance Bill will impose the discretionary trust inheritance tax regime on most new trusts. Lifetime transfers into trusts will be liable to 20% inheritance tax if they exceed the nil rate band, £285,000. There will also be a periodic tax charge of up to 6% every ten years and an exit charge when property is removed from the trust, in most cases to the extent that the value of the trust assets exceeds the nil rate band at the time.

One type of trust affected is the accumulation and maintenance trust (A&M). These trusts are commonly used to pass wealth to children and grandchildren free of inheritance tax while retaining some control while the beneficiaries are young.

Under the current draft legislation, existing A&M trusts will come within the new rules on 6 April 2008, unless they provide for the assets to go to beneficiaries absolutely at age 18. New A&M trusts created on the death of a parent will also escape ten-year and exit charges provided the child becomes entitled to the assets at 18, a condition that will cause concern in many families.

The tax changes also have an impact on provisions in a will that give a surviving spouse an income but pass the capital to the children after the second spouse’s death. This is because the inheritance tax exemption for assets passed to a spouse or civil partner will no longer apply to such arrangements.

Contrary to initial fears, it seems that the proposed changes will not put an end to many insurance-based inheritance tax planning schemes. Insurance companies withdrew several plans after the Budget, but many are now back on sale, although some are less flexible than they used to be.

We strongly advise all clients to review their wills, inheritance tax planning and any interest in an existing trust, once the legislation is clear in July, to assess the impact of the changes and what action can be taken.

Developments in the progress of the Finance Bill through Parliament has meant that some of the proposed measures have been amended since the publication of this article. Please get in touch with us for further details as to how these changes in legislation may affect you.